TAM SAM SOM: How to Define and Capture Your Market Share?
TAM SAM SOM: How to Define and Capture Your Market Share
Every business needs to understand the market in which they intend to operate. Market analysis is a critical component of any business. You need to understand your market in order to be successful in the business. A complete grasp of your market helps you to understand how to advertise your product and grab customers. Talking about the market, there are three metrics that you need to understand to be successful in your business: tam, sam, som. These metrics guide you in defining your target market and lead you toward refining your business model, optimizing sales strategies, and, as a result, generating big revenue. In this article, we will educate you on Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM) and how you can use them for your business growth.
Understanding TAM (Total Addressable Market)
Total addressable market means the overall revenue opportunity available if the business’s product captures 100% of its target market. It shows the maximum market potential for a business by considering the entire market size for a particular product or service. Understanding TAM helps businesses to evaluate revenue opportunities in the entire market. Additionally, it helps to provide the foundation for strategic planning and decision-making.
Understanding TAM is important for investors and entrepreneurs. It is an important metric for assessing the potential for growth, market demand, and revenue opportunities. It shows the attractiveness of the market and the potential for the business to scale. Additionally, it helps to make informed decisions about resource allocation, product development and market strategy. If you are selling your product, your target audience will be global. And if you are selling a product to a country or a city, then your total addressable market will be that country or city.
TAM can be calculated using various methods. The three main methods to calculate Tam are the top-down approach, bottom-up approach, and value theory.
Top Down Approach
In the top-down approach, you start calculating TAM using the estimate of the overall market size and then narrow it down gradually to your specific location and product target. Below are the steps to calculate TAM using a top-down approach.
Start with the Broad Market
The first step is to identify the total size of the relevant industry. You may be assessing the size of global or regional markets based on your product or services. For example, if you are in the software industry, you might start with the total global market size of the software industry.
Segment the Market
Now, break down the broad market into specific segments that are more relative to your product or service. You can make these segments based on different factors such as geography, customer type, industry or product category. For instance, for your software-based product, you can segment the market according to software types, i.e., enterprise software, consumer software, or a specific application like accounting software.
Focus on Your Target Segment
Narrow your focus to a specific segment according to your product or service. For example, for your accounting software product, you need to focus on the location in which you will be operating. For example, if you intend to operate in North America, then the customer segment that uses or intends to use accounting software will be your target segment.
Estimate the TAM
TAM is the revenue opportunity available in your target segment if your product dominates the market. It is calculated by determining the number of potential customers located in the target segment and multiplying it by the average revenue per user(ARPU) or the price of your product or service.
Example
- Broad Market: Global software market worth $1 trillion.
- Segment: Accounting software market worth $200 billion.
- Target Segment: Accounting software in North America worth $20 billion.
- TAM: The TAM would be $20 billion, representing the total market potential if your product were to capture 100% of this segment.
Bottom-Up Approach
The bottom-up approach to estimating TAM is more reliable than the top-down approach. It starts at the most granular level and builds up to the total market size related to the product. It is considered more accurate as it is based on actual data and more specific assumptions.
Identify Your Core Market
Start by identifying your core market, which comprises the customers who use your product or service. To identify your core market, you need to analyze the existing customer base or identify a target demographic for a new product through market research. For example, if you are selling an accounting software product in North America, your core market will be businesses that require accounting software.
Determine the Number of Potential Customers
Now, you need to estimate the number of potential customers within your core market. For this purpose, you need to research the number of individuals that fit your customer profile in a specific geographic area or industry. For instance, you have identified your core market for accounting software products, and now your potential number of customers will be the number of individuals who use or tend to use accounting software.
Calculate the Average Revenue per User (ARPU)
Calculate how much revenue you expect to generate from each customer by selling your product. Include all prices, subscription fees, average purchase size, or other relevant metrics.
Multiply to Find TAM
Multiply the number of potential customers with ARPU to calculate TAM. It will give you the total revenue opportunity if your product or service dominates your core market.
Example
- Core Market: Small and medium-sized enterprises (SMEs) in North America.
- Number of Potential Customers: 1 million SMEs.
- ARPU: $500 per year for your accounting software.
- TAM: 1 million SMEs * $500 = $500 million.
Value Theory Approach
The value theory approach is based on estimating the market size considering the perceived value of the product or service. This approach is particularly useful when a product or service lies in an untapped market. The business owners will assess the value their unique product or service provides and estimate TAM using that value. The steps to calculate TAM based on the value theory approach are as follows:
Understand Customer Needs and Willingness to Pay
The value proposition starts by understanding the target customer’s need, pain point, and the value your product or service provides to the users. To estimate the value of your product, you need to conduct customer research, surveys and understand how your product improves efficiency, reduces costs, or adds significant benefits.
Estimate the Perceived Value
Now, the entrepreneurs need to understand how much their product saves for the users. Your product can save time and money or provide any other quality benefits. For example, your developed tires work double the time as compared to typical tires and save 5000 USD per annum to the customer. Then, the 5000 USD will be the perceived value of your product.
Determine the Value-Based Price
Once you know the value your product provides to the customers, you need to put a price on your product. For example, if your manufactured tires save 5000 USD per annum to the customer, you can put a price of 1000 USD on them so that you are offering a strong value proposition, i.e., 5x return on investment for the customer.
Estimate the Number of Potential Customers
Now, identify the number of customers in your target market that can profit from your product. Additionally, they must be willing to pay the price you put on your product. You may need to conduct thorough market research to understand the size of your target demographic or industry.
Calculate TAM
To calculate the TAM, multiply the value-based price by the number of potential customers. This approach works for scenarios where the product or service is unique and has a unique selling point.
Example:
- Product: A new energy-saving device for industrial manufacturers.
- Perceived Value: The device can save manufacturers $100,000 annually in energy costs.
- Value-Based Price: Based on the savings, the device is priced at $20,000, offering a 5x return on investment.
- Number of Potential Customers: There are 10,000 large industrial manufacturers in the target region that could benefit from this device.
- TAM: To calculate the TAM, multiply the value-based price by the number of potential customers:
TAM = 10,000 manufacturers * $20,000 = $200 million.
Understanding SAM (Serviceable Available Market)
Serviceable Available Market (SAM) is the portion of the Total Addressable Market (TAM). It is the portion of the market that your business’s products or services can realistically target and serve. SAM targets the segment of the market that aligns with your business reach based on geographic location, demographics and product need. Moreover, it is a refined version of TAM that provides realistic stats about the market that your business can address.
For example, TAM for your product is the accounting software market in North America, which is worth $20 billion. Your company specializes in accounting software for small and medium-sized enterprises (SMEs). Based on the facts provided, your SAM will be the portion of $20 billion dollar that includes SMEs in North America. Following are the steps to calculate SAM:
Demographic Segmentation
Once you have estimated TAM for your product, you need to assess your SAM. For this purpose, you need to identify the ideal customer profile(ICP) for your product or service. ICP is the customer profile that is your target. ICP measures may include business size, industry, income level, or other relevant characteristics. For example, if your accounting software product is specifically designed for SMEs, your ICP will match the SME profile located in North America.
Market Research and Data Analysis
You need foolproof market research to gather data on specific market segments that your product can serve. Analyze this data to transform your TAM into SAM. For example, you found that SMEs in North America represent 25% of the accounting software market in North America. Then, this 25% market will be used to evaluate your SAM.
Example of SAM
- TAM: Accounting software in North America worth $20 billion.
- SAM: The SAM would be $5 billion, representing 25% of the total North American accounting software market, specifically targeting the small and medium-sized enterprises (SMEs) segment that your product can realistically serve.
Understanding SOM (Serviceable Obtainable Market)
Serviceable Obtainable Market (SOM) is the portion of the Serviceable Available Market (SAM). It is a realistic estimate of the market that your business can actually capture within a certain time frame. SOM is measured based on a more refined estimate that considers the company’s competitive position, market strategies, and current capabilities. Additionally, it represents the achievable market share by factoring in the competitive landscape and the company’s resource allocation.
For example, if your TAM is $20 billion in the accounting software market in North America, and your SAM is $5 billion (focusing on SMEs), your SOM would be the portion of this $5 billion that you can capture, considering factors such as the competitive landscape and your company’s ability to scale. The steps to estimate SOM are as follows:
Analysis of Competitive Landscape
Analyze the competitive landscape. Conduct competitive analyis and study industry reports to understand the market share of existing players. Identify gaps that your product can fill. This analysis will help you to estimate a realistic, obtainable market.
Market Conditions and Trends
In order to calculate SOM, you need to evaluate market conditions and market trends. Analyze the factors that can impact your business growth, such as market dynamics, customer demand and potential for growth in your target niche.
Company Capacity and Resources
Along with assessment of external factors like competition, customer demand and trends, you also need to assess the internal condition of your product and business. This includes your capacity to capture market share, production capacity, marketing budget and overall resource allocation.
Example of SOM
- SAM: The SAM is $5 billion, representing 25% of the total North American accounting software market, specifically targeting the small and medium-sized enterprises (SMEs) segment that your product can realistically serve.
- SOM: The SOM would be $500 million, representing 10% of the $5 billion SAM, which is the portion of the market that your business can realistically capture. It is estimated by considering factors such as competition, market conditions, and your company’s current capacity and resources.
Example of TAM, SAM, and SOM for a Health and Fitness App: FitTrack Pro
TAM (Total Addressable Market)
Let’s build a scenario in which you have a business idea to develop a health and fitness app called “FitTrack Pro”. The global health and fitness app market is worth $100 billion. It represents the maximum revenue potential if FitTrack Pro could capture 100% of this market.
TAM: The TAM for FitTrack Pro is $100 billion. It shows the total market size and the potential market opportunities available if every potential customer adopts FitTrack Pro.
SAM (Serviceable Available Market)
Now, suppose you designed FitTrack Pro specifically for individuals in the United States who are interested in personalized workout plans and nutrition tracking. Now, you need to do market segmentation to calculate SAM. By conducting a bottom-up analysis using market research tools, you determine that the U.S. market for health and fitness apps focused on personalized workout plans and nutrition is worth $20 billion.
SAM: The SAM for “FitTrack pro” would therefore be $20 billion. It represents 20% of the total market size, i.e., TAM. This is the realistic potential market that FitTrack Pro can serve based on your geographic reach and target customer base.
SOM (Serviceable Obtainable Market)
After analyzing the SAM, you need to calculate SOM. In order to understand SOM, you need to conduct a thorough analysis of the competitive landscape. After competitor analysis, you identify that well-established fitness apps dominate 60% of the U.S. market for personalized health and fitness solutions. This means that only 40% of the market is open to competition.
Additionally, you need to consider your current resources, marketing strategy, sales efforts and distribution channels. After carefully weighing all factors, you estimate that “FitTrack Pro” can realistically capture 15% of $20 billion SAM.
SOM: The SOM for “FitTrack Pro” will be $3 billion, which represents 15% of the $20 billion SAM. This figure reflects the share of the market that FitTrack Pro can realistically obtain. This number is calculated after taking into account the market saturation, competitive dynamics, and your company’s capacity. It represents achievable goals that a FitTrack Pro can achieve.
Summary
- TAM: $100 billion (Global health and fitness app market).
- SAM: $20 billion (Targeting personalized workout and nutrition apps in the U.S., representing 20% of the TAM).
- SOM: $3 billion (The portion of the SAM that FitTrack Pro can realistically capture, representing 15% of the personalized fitness app market in the U.S.).
This example illustrates how FitTrack Pro can assess market opportunities, i.e., TAM. SAM helps to refine those opportunities to a specific geographic and demographic segment. Furthermore, competitive dynamics and realistic business strategies lead to the calculation of SOM, which represents the achievable share of the market. TAM SAM SOM ensures that the business objectives are aligned with the actual potential revenue and growth potential in the target market, leading to informed strategic decisions.
| Metric | Definition | Examples/Usage |
| TAM (Total Addressable Market) | TAM refers to the total market size or revenue opportunity available if a business captures 100% of its target market. | Example: If your product has a TAM of $100 billion globally, it represents the maximum market potential. |
| SAM (Serviceable Available Market) | SAM is the portion of TAM that your business’s products or services can realistically target and serve, considering factors like geography, demographics, and product needs. | Example: For a SAM calculation, if your product targets SMEs in North America within a $20 billion TAM, your SAM might be $5 billion. |
| SOM (Serviceable Obtainable Market) | SOM is the portion of SAM that your business can realistically capture, considering market conditions, competition, and your company’s capabilities. | Example: If your SAM is $5 billion, and your SOM is 10%, then your business can capture $500 million, representing your achievable market share. |
| TAM vs SAM vs SOM | TAM is the broad market size, SAM narrows down to the targetable market, and SOM is the realistic market share you can capture. | Example: For a fitness app, TAM might be $100 billion globally, SAM could be $20 billion in the U.S., and SOM might be $3 billion based on competition and your company’s market strategy. |
Frequently Asked Questions
What is TAM in business?
TAM stands for Total Addressable Market and refers to the total market size for a product or service if it were to achieve 100% market share. It represents the entire revenue opportunity available in a business.
How do TAM, SAM, and SOM differ?
TAM is the broad Total Addressable Market, SAM is the Serviceable Available Market that your business can realistically target, and SOM is the Serviceable Obtainable Market that reflects the portion of SAM you can actually capture.
How is SOM calculated?
SOM is calculated by analyzing the SAM and determining the percentage your business can realistically obtain, considering the competitive landscape and market share potential.
Why is TAM/SAM/SOM important in a pitch deck?
Including TAM, SAM, and SOM in a pitch deck shows investors the potential market size and the realistic share of the market your business can achieve, making a compelling case for investment.
Conclusion
Every business needs to understand TAM, SAM, and SOM in order to understand its market and business growth potential. These metrics, Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM) help businesses identify market opportunities, refine their business model, and optimize sales strategies. Proper implementation of these metrics allows businesses to target the right market segments, estimate realistic market share, and make informed decisions. Incorporating TAM, SAM, and SOM into a pitch deck also strengthens the case for investment, demonstrating a clear path to success.
Unlock your business’s full potential with Oak Business Consultant’s market research services. Our experts help you accurately define your TAM, SAM, and SOM. This enables you to identify market opportunities, refine your strategy, and optimize sales efforts. Whether you’re preparing a pitch deck or planning for growth, we provide the insights you need to make informed decisions and secure investment. Let’s work together to chart a clear path to success. Contact us today to get started!
